Can India live up to its promise this time?

PeterKohli

I get investors' frustration with India, I really do. Just because I'm bullish on the world's third-largest economy for the long term doesn't mean I can't see the ironies of the current situation.

I'll give you an example. I was in Los Angeles giving a talk and I opened the Times of India to read that India is going to launch a Mars probe. I told the group I was addressing that maybe they should build some roads and bridges here on earth first.

This is the same country that just passed legislation providing 67% of the population with food aid in a blatant attempt to buy votes. Who's going to pay for the project was, of course, not addressed. And they're going to Mars?

India has many of the right ingredients for a first-world country. It has a 250-million-strong middle class with money to burn. It has 600 million people under the age of 29, many highly educated and eager to contribute to society. It has multinational companies like Tata
500570, +0.86%
and Mahindra & Mahindra
500520, -1.33%
in its borders.

So what's the problem? I would say that sometimes Indians need to get out of their own way. Like the food-aid program. Often, things are done for populist and ideological reasons which cause investors both inside and outside the country to shake their heads in disbelief — and hinder the country's progress.

A perfect example is what happened to Vodafone Group PLC
VOD, +0.68%
In January 2012, India's Supreme Court ruled the UK-based telecom giant was not liable to pay $2 billion in taxes for its $11.2 billion acquisition of a controlling stake in an Indian cellphone company held by a Hong Kong company. The verdict overturned a ruling by a lower court in Mumbai after a four-year legal fight by Vodaphone and signaled encouragement to foreign investors concerned about India's investment climate when it ruled that Indian authorities don't have jurisdiction to tax the deal because it was structured as a transaction between two foreign entities. Then, in March of 2012, India changed its taxation laws, essentially overturning the Supreme Court judgment and brought under scrutiny similar deals involving multinational companies.

Nevertheless, I think the turnaround for the Republic of India is close at hand. It will come after the May 2014 national elections if the country elects the Bharatiya Janata Party (BJP), and Raguram Rajan, the Governor of the Reserve Bank of India (RBI), is given the opportunity to further work his magic.

Rajan is one of the main reasons to be bullish on India right now. In fact, things at the macro level have already started to improve due to his actions guiding the RBI. For instance, during the summer, the rupee slumped to a record low of 68.85 to the dollar; his policies have helped raise it to around 63 today. Also, Rajan (pleasantly) surprised many when he said India's current account deficit (CAD) for the fiscal year was $56 billion, well below estimates of $70 billion. India's large CAD, which stood at $88 billion the previous fiscal year, was one of the main reasons for the rupee's fall. At $56 billion, the CAD is now less than 3% of India's GDP, well below the anticipated 7%, and India is well positioned to weather the eventual tapering of the U.S. Fed's bond-buying program.

In my opinion, the defeat of the BJP in the 2004 general elections contributed to derailing India's progress. We can see this in the country's GDP growth, which slowed to 4.4% this year, a five-year low.

I've been asked if there are any good entry points to India before the elections. The answer is yes and no.

Yes, in that companies like Tata (the steel-auto-tooling conglomerate) and Mahindra & Mahindra (an auto, farm-equipment and IT conglomerate) are strong plays. However, it's interesting to note that a majority of their income comes from non-domestic sources. When companies like this can capitalize on the opportunities within their own borders as well as internationally, that's when Indian equities will really show their promise.

And no, because there are significant risks to my thesis. The BJP party must win the elections in May of 2014. If they do, then I say throw as much money as you can at India.

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